DeFi Lending Platforms. DeFi lending services aim to close the divide between traditional banking and cryptocurrencies. As a result, they both meet the requirements for mainstream acceptance of blockchain and cryptocurrency and provide a new avenue for financial services. DeFi is widely known as “open finance” because of its pioneering work in the open banking space, which allows people to obtain financial services without needing a third party.
This article provides all the information you require regarding DeFi lending and includes some specifics on the leading DeFi lending platforms. To begin with, it is crucial to define DeFi lending and highlight several critical differences between DeFi borrowing and conventional financing.
DeFi Lending and Borrowing in 2024
In DeFi lending, investors and lenders issue a loan or deposit fiat for interest through a distributed system and a decentralized application. On the other hand, an individual or business borrows money for interest through a decentralized network. Both lending and borrowing use DApps, Smart contracts, and other protocols used by the best DeFi lending platforms. However, there are several DeFi lending platforms you may want to know about.
How Does DeFi Lending Work?
Decentralized lending is as simple as taking money out of your pocket and giving it to a friend. The decentralized application and smart contracts represent your intermediaries and negotiators, respectively. Loaning $50,000 through a DApp only requires a few clicks.
You open a DApp, which hosts a smart contract and a pool of borrowers. The platform lets you decide what interest rate you want to set on a loan. Concurrently, the smart contract automates the lending and borrowing agreements.
A community-run decentralized autonomous organization (DAO) usually oversees the governance of a DeFi platform. The number of governance tokens each user holds determines how much power they have to vote on changes to the platform. Governance tokens are cryptocurrencies minted on DeFi platforms through borrowing and lending. In a way, they are incentives for trading on a platform.
Most governance tokens on the top DeFi platforms are also actively traded on major exchanges. DAOs also have active forums for discussion, troubleshooting, and tech support. A DeFi lending platform is similar to a traditional one, except that no central authority exists. Consequently, all your transactions are across a trustless network.
Trusted DeFi Lending Platforms Reviewed In Detail
Aave [LEND]
Aave is an open-source, non-custodian protocol built on Ethereum that makes it possible to create money marketplaces. Despite providing additional services, loans, and borrowing are its main draws. It provides a dual DeFi token model: aToken and LEND, similar to several other DeFi lending systems. The platform is the most widely used DeFi lending platform, debuting in 2017.
LEND is the governance token, and AAVE is an ERC-20 token where lenders compound interest. Aave provides various lending products and services, including Flash Loans, “rate switching,” uncollateralized loans, and particular kinds of collateral. The type of token being deposited affects the interest rate. With yields of about 12%, some stablecoins—tokens tied to the dollar—now provide the best returns on the market.
Basic Attention Token (BAT), Dai (DAI), Ethereum (ETH), Kyber Network (KNC), Aave (LEND), ChainLink (LINK), Decentraland (MANA), Maker (MKR), Augur (REP), Synthetix (SNX), TrueUSD (TUSD), USD Coin (USDC), Tether (USDT), Wrapped BTC (WBTC), 0x (ZRX), and Synthetix USD (SUSD) are just a few of the many assets supported by Aave, one of the DeFi lending platforms.
Maker
The Multi-Collateral Dai (MCD) system, known as Maker Protocol, is one of the most reliable DeFi lending and borrowing platforms. It was established in 2015 to avoid the market’s volatility for cryptocurrencies. As a result, DAI, the native stablecoin, is based on the dollar for lending and borrowing purposes according to the provisions of smart contracts.
The open-source MakerDAO protocol, based on Ethereum, allows users with ETH and MetaMask access to lend DAI. It offers two token models, Maker and DAI, like many other DeFi lending services. The governance token that keeps the system stable is called Maker Token. The platform provides users with a scalable interest rate on DAI deposits.
Compound Finance
The Compound is another well-known, openly available smart contract created on the Ethereum Blockchain. Both lenders and borrowers can use it to lock their cryptocurrency assets into the protocol. In contrast to other DeFi lending systems, cTokens enables tokenizing assets locked in the system. Users with locked-down holdings on the platform can exchange them thanks to tokenization.
As such, you receive a token—which you may use as collateral—when you deposit ETH. Conversely, its DeFi token is the COMP token. However, it supports a wide variety of nine Ethereum-issued assets, such as BAT, DAI, SAI, ETH, REP, USDC, WBTC, USDT, and ZRX.
Depending on the supported currency, its DeFi lending and borrowing rate varies. As of December 6, 2022, the platform lending and borrowing rates are 2.63% and 0.86%, respectively, for 30 days.
InstaDApp
This is a multi-purpose DeFi platform that manages digital assets. It provides a variety of DeFi services like lending, borrowing, swap, leverage, etc. Look at it as a DeFi bank that allows you to integrate your services to serve your purpose. The platform offers users one-click switching platforms to easily switch to cheaper lending platforms with lower interest rates, especially for Maker and Compound.
By implication, it offers you a smart wallet portal for DeFi protocols. However, it is as simple as owning a Coinbase wallet, MyEtherWallet, or any related one to borrow, trade, or swap. The platform is free to use but charges ETH for transaction fees. Returns on the platform currently range from as low as 0.01% to 4%.
dYdX
dYdX brought margin trading, options, and derivatives to the blockchain space, typically found in fiat markets and typical for traditional investments. Users can trade, lend, and borrow ETH, DAI, and USDC on the platform. It also offers cross-margin trading and isolated margin trading, as well as using a perpetual market contract of BTC/USDC of 10x leverages.
Loans on the platforms are 125% collateral and 115% self-liquidation. Unlike many other DeFi lending platforms, it doesn’t have a native token, so trading fees are charged in the supported tokens. Lending and borrowing rates on the platform range between 0% and 0.02% as of 6 December 2022 for 30 days.
Dharma protocol
It is a decentralized platform for tokenized debt and finance on which lenders, borrowers, and other fund managers exchange and conduct business. It uses a system called Dharma Settlement Contracts, which imitates the conventional financial instruments and parties, such as agents, usually involved in loan facilitation. The network is run by four primary agents: Relayers, Underwriters, Lenders, and Borrowers. Lenders and Borrowers are basic businesspeople. Underwriters are the agents in charge of determining the likelihood of default and structuring the terms of the debt issue. In contrast, relayers are the ones that host the order book for prospective lenders to peruse.
NFT marketplace OpenSea just purchased the platform. Dao serves as the stablecoin in Dharma, which darkens govern. The platform provides scalable deposit returns and supports USDC, ETH, and all ERC-20 tokens.
bZx
The platform provides a unique alternative to decentralized margin trading. It leverages bZxR tokens to help relayers collect trading fees. Unlike some other DeFi platforms, relayers match orders from borrowers and lenders so that borrowers may receive margin loans. However, the platform relies on the upkeep of a deep insurance fund. Therefore, charging lenders 10% of their earnings and aggregating it into the funds ensures that lenders will always be covered if borrowers cannot repay their loans.
However, since rebranding in 2018, it has integrated two other DeFi platforms: Fulcrum Trade and Torque, a decentralized lending and margin trading platform, and a DeFi borrowing platform. bZx supports tokens based on Ethereum, Polygon, and Binance Smart Chain and offers vastly scalable interest rates.
Anchor Protocol
Based on the Terra blockchain, this protocol allows users to earn interest on deposits of the stablecoin TerraUSD (UST). While relatively new compared to other protocols on the list, Anchor shot to fame on its flat 20% earn rate for deposits. The protocol achieves this by using interest payments from borrowers on the platform and a large UST reserve maintained by its community.
Hifi
Formerly known as Mainframe, Hifi is a Polygon-based platform that offers returns on stablecoin deposits. The platform’s key feature allows users to create fungible debt obligations, or a bond-like instrument, that settle on a set date. The platform also has a bridge function that enables using tokens from other blockchains as deposits or collateral. Its governance token is Hifi Finance (MFT).
Why Decentralized Lending?
While Decentralized finance gave finance a new meaning, Decentralized lending provided various lending opportunities and benefits to lenders. Therefore, DeFi lending has the following benefits:
Hedge funding
In general, the cryptocurrency space is volatile, often sending investors packing. Therefore, if the investor doesn’t want to get burnt in the market, frustrating price swings, the investor or holder sell-off at a bull run; however, DeFi lending provides an opportunity for the investors who want to hold Crypto for a specified time.
Also, top DeFi lending platforms allow traders or investors to deposit Crypto for fiat to fulfill other needs without selling it off. For instance, a business that holds crypto assets and won’t want to sell to execute a project could approach a DeFi lending platform to deposit Crypto for fiat to manage the project.
Earn interest in holding crypto assets
You don’t need to sell off as a crypto asset holder to avoid the bears. Instead, you lend it out with agreed interest rates defined in the smart contract. Within the stipulated time, you earn your money with interest. Consequently, DeFi lending becomes a haven for panic sales.
Meanwhile, the underlying technology of DeFi doesn’t demand rigorous documentation, as seen in the traditional lending system. Instead, it is a function of clicks through a Decentralized Application. A crypto wallet is only required to transact with a DeFi platform.
